Betrayers of the Dream

In this October 10, 2013 file photo, California Attorney General Kamala Harris gestures while standing by a display showing an internal document showing the target demographic of Corinthian Colleges, during a news conference in San Francisco.

This article appears in the Summer 2015 issue of The American Prospect magazine. Subscribe here.

On April 26, an institution of higher education that as recently as 2010 employed more than 6,000 faculty members and another 4,000 in support staff announced that it would close its doors. Corinthian Colleges had enrolled more students than the Ohio State University and the University of Texas at Austin combined. For the giant for-profit chain founded just 20 years ago, the fall from grace was aided by lawsuits from several state attorneys general and the federal government, and investigations by the SEC. These found a broad pattern of deception in recruiting students, bogus reporting of job placement data, and a strategy of combining high tuitions and debt levels with a substandard educational product.

Corinthian’s story is a microcosm of the for-profit college sector over a period of three decades, a story dotted by aggressive corporate expansion and creative evasion of federal oversight. On June 8, Education Secretary Arne Duncan announced debt relief for some 40,000 former Corinthian students, who collectively owed more than half a billion dollars, and a relief application process for as many as 300,000 more. “You’d have to be made of stone not to feel for these students,” said Duncan. “This has to be a wake-up call to Congress.”

In the publicity about the government’s belated crackdown on the for-profit education industry, one key fact has not gotten sufficient attention: The students targeted and affected most by fraudulent operators are disproportionately black. The story of predatory for-profit colleges is not unlike that of subprime lending or the proliferation of payday loans. Wider economic unease was used by the cynical to bring further distress to people of color.

What made possible the for-profit higher education business model was the pot of federal financial aid, including Pell Grants, student loans, and G.I. Bill benefits—combined with inadequate federal oversight. The for-profit sector saw enrollment increase by 225 percent between 1998 and 2008, compared to a 31 percent increase in the total college-going population. This enrollment growth included a massive targeting of students of color.

The University of Phoenix, for example, was spending as much as $400,000 a day on advertising. Ads for these colleges were ubiquitous in communities of color, on commercials for daytime television programs, at bus stops and subways, and in other places where black and brown people congregated. They enlisted leaders in the black community to advertise on their behalf, as comedian and television host Steve Harvey has for Strayer University, or as Al Sharpton did when devoting glowing television coverage to the University of Phoenix in a special that was sponsored by the for-profit behemoth.

A 2012 Senate investigation revealed many for-profit recruiting practices that were little more than racial dog whistles. One presentation for recruiters at Vatterott College, a St. Louis–area for-profit, advised recruiters to target the “welfare mom with kids” and “pregnant ladies,” as well as those with records of “recent incarceration” and “drug rehabilitation.” Other colleges had recruiters drop off information at Section 8 housing and unemployment offices, where high numbers of potential low-income and minority students could be found.

The appeal was often vocational. For-profit colleges issue nearly half (45 percent) of all certificates—short-term credentials that ostensibly provide the opportunity to learn a trade quickly. In the case of many associate’s and bachelor’s degree programs, the appeal resided in the flexibility of class schedules, or the ability to go to school from home.

Stefanie DeLuca, a sociology professor at Johns Hopkins University who has spent years researching and tracking the fortunes of young adults in Baltimore, explains the attraction of for-profits in communities of color. DeLuca sees “a generation of kids struggling to find out what they want to be,” she says. “They’re not moving to four-year schools in dorms. [But] they have a lot of information and mixed signals coming at them. These kids see these commercials, for the ITTs or the cosmetology schools. They see pictures of people doing things and think ‘I can do that.’” These are students often without the benefit of college counselors, making what appear to be logical decisions based on the signals and available information.

Far too often, the result is a low-value debt bomb, backed nearly entirely by government funding. The average student debt for graduates at for-profit four-year colleges (like many Corinthian campuses) has reached nearly $40,000, nearly $15,000 more than graduates at public four-year colleges, and over $6,000 more than graduates at historically black colleges and universities.

The differences for those seeking two-year degrees are even more stark. Tuition at community colleges nationally is $3,347. At a for-profit, it’s $15,230. Average cumulative debt for black graduates at two-year for-profit programs is nearly $26,000, and 93 percent of students must borrow. At community colleges, which are often competing for the same low-income, adult, or first-generation students, far fewer students borrow and debt levels are nearly $10,000 lower. On average, a black student takes on more debt for a two-year degree at a for-profit college than a white student does for a bachelor’s degree at a public college.

An even larger problem—particularly acute for black and Latino students—is the dropout rate. Only about one in five black students complete a program at four-year for-profit colleges, twice the dropout rate at public and private nonprofit four-year programs. At legitimate community colleges, completion rates are also low, but students at public colleges don’t have to contend with tens of thousands of dollars in debt heaped on them by for-profits. And dropouts are far more likely to become delinquent or default on their loan.

A full 53 percent of student loan borrowers at four-year for-profit programs drop out, including 65 percent and 67 percent of black and Latino borrowers. Compare this to about one in five borrowers at public four-year colleges and one in three borrowers at community colleges, and you quickly begin to realize that even if for-profits could claim to offer a similar product, it’s one that comes with far greater risk.

And that’s before value is factored in. Estimating the returns on for--profit degrees—or any college degree—is difficult, given that students enter college at very different levels of financial well-being and academic potential. But Harvard University’s David Deming, Claudia Goldin, and Lawrence Katz found that for-profit institutions produced lower earnings for students and far less student satisfaction than other colleges, even after adjusting for the type of students who attend. Another study from George Washington University’s Stephanie Cellini and Latika Chaudhary found that for-profit colleges produced an extremely modest earnings boost compared to high school graduates, one that’s unlikely to make up for the tens of thousands of dollars in debt taken on by students. This explains why for-profit colleges enroll about one in ten American college students, but make up around half of all student loan defaults. This also helps explain why the default rate on student loans for black students is nearly six times higher than that of white students.

ACCORDING TO THE2012 Senate report, the 15 publicly traded for-profit colleges received 86 percent of their funding from federal financial aid in 2011. Given racial wealth disparities, black students are far more likely to be low-income and thus be eligible for Pell Grants, and are also far more likely to need to borrow, and thus be eligible for student loans.

Insatiable demand for higher education in the late 20th century, combined with a lax regulatory environment, garnered Wall Street’s attention in a hurry. Several for-profit parent companies, including DeVry in 1991 and the University of Phoenix in 1994, issued IPOs and immediately became boom stocks. The cash infusion allowed enrollment to soar; Phoenix was enrolling 100,000 students within five years of going public, and grew by more than 25 percent annually.

The enrollment allowed for a form of mission creep. Rather than sticking to a centuries-old objective of offering flexible, short-term degrees or certificates in trades—something that some for-profits often did (and still do) well, many began to offer more two- and four-year programs, trying to emulate their public and private nonprofit counterparts. Between 2000 and 2012, there was a 469 percent enrollment increase in for-profit programs offering bachelor’s and graduate degrees. The result has been far greater debt with little sign of an increase in quality.

The other great impact of Wall Street money was the influence it garnered. Despite warning signs and industry whistleblowers (including those from the University of Phoenix) coming forward during the Bush administration, both the White House and Congress eased restrictions on the ability of online colleges to access federal aid funds, as well as rules that attempted to prevent the abuse of incentive compensation for enrolling large numbers of students. The ideological support for the private sector was reinforced by campaign contributions. Between 2002 and 2006, then–Majority Leader John Boehner and the Republican chairs of the House and Senate education committees took in nearly one in five dollars donated by the for-profit college industry. Phoenix alone contributed $11 million to candidates in the 2008 election cycle. The industry’s representatives in the late 2000s resembled a who’s who of influential Republicans and Democrats, including former House Majority Leader Dick Gephardt and former Senate Majority Leader Trent Lott, all of whom helped at least prevent any real regulatory or Congressional scrutiny—again, to an industry that received the vast majority of its funding from federal aid. The for-profits became yet another case study in crony capitalism.

These companies even remained profitable during the financial collapse and the recession, thanks in part to a perverse brand of Keynesian counter-cyclical stimulus: The economy might be on the ropes, but the federally guaranteed student loans kept coming, as students who faced poor employment prospects looked to higher education. Part of the cushion stemmed from the ability to milk the parents of undergraduates. Even though the federal government has set limits on how much undergraduates can borrow, the feds still provide high-interest loans to the parents of undergraduates (called Parent PLUS loans), and a disproportionate amount of these loans flow to for-profit colleges. So colleges found a way to not only maximize the amount that low-income students and students of color could borrow, but they started targeting parental wealth as well. The result, as Suzanne Mettler details in her book Degrees of Inequality, is that ITT and Strayer achieved higher profit margins than both Apple and Coca-Cola in 2010, with the Apollo Group (which owns Phoenix) and Corinthian not far behind.

THE CORE DEFENSE OF THESEcolleges usually boils down to two claims: They enroll the students who are not attending prestigious public or private colleges, and their success rate is reflective of the preparation of the students to whom they cater. The issue has divided the civil rights community—including the NAACP and the National Urban League—as well as members of the Congressional Black Caucus. Some have bought the line that without for-profit colleges, students would be turned away from community colleges already at capacity, and surely wouldn’t be able to attend more selective public or private institutions. It’s a clever defense, and one that might be persuasive—if those students were provided a decent education in return instead of an infusion of debt, often without a degree.

While the for-profits exist in a market of few barriers, they are also a response to the unwillingness of states or the federal government to meet the demand for education with a supply of affordable public colleges. Starting in the late 1970s, states began to slash higher education funding, to a point where 2012 saw the lowest per-student state spending on higher education in 25 years. Even post-recession, states are funding higher education below pre–financial crisis levels, leaving tuition to carry most of the load. Worse, community colleges—the institutions that offer the best low-cost alternatives to for-profit programs—receive comparatively less funding from a dwindling state pie.

Consider how this drama has played out in one locale in the news recently because of racial tensions: Ferguson, Missouri. Less than ten miles away from Ferguson sits the most prestigious university in the region: Washington University in St. Louis. At Wash U., only 10 percent of students are black or Hispanic, and only 6 percent of students are low-income enough to receive a Pell Grant, the lowest percentage in the country. In Missouri overall, students have far less access to opportunities like Advanced Placement courses or extracurricular activities than do their national counterparts—opportunities that could lead to greater participation at schools like Wash U., or at public flagships.

Meanwhile, Corinthian set up three campuses across the state (now all closed), and for-profit colleges operating in the state enrolled nearly 36,000 students in 2013 (down from over 45,000 in 2011)—about the same number as those who attend the flagship University of Missouri, and more than the student populations of Wash U. and St. Louis University combined. And remember Vatterott College, the St. Louis for-profit targeting the “welfare moms” and the “recently incarcerated”? The Senate found that the cost of a certificate in “Information Systems Security” at Vatterott was $24,500, compared to $4,383 for a similar credential at St. Louis Community College.

WHAT DOES THE FUTURE HOLD for the for-profits? After years of growth in both profit and enrollment, nearly the entire sector has seen sharp declines. Beyond Corinthian’s collapse, enrollment among the major for-profit institutions has drastically fallen across the board. Phoenix alone saw its once-staggering enrollment of 470,000 reduced to a still-staggering, if much lower, 214,000 students this year.

There are plenty of reasons for the massive retrenchment, but perhaps the most important has been the belated attention on the part of the Obama administration, a handful of Democrats, and even state regulatory officials. For its part, the administration has repeatedly proposed regulations attempting to link the ability of colleges to utilize federal aid with their students’ ability to pay off loans and maintain student debt in line with their income, and while these rules have been stymied in court, the sector has taken a public-relations beating. Other regulatory arms have also stepped up oversight, including the Federal Trade Commission. In 2013, the FTC released strict guidelines on marketing practices in vocational programs, which make up the vast majority of certificate and even two-year programs.

In addition, the aforementioned Senate report, spearheaded by Tom Harkin, the now-retired chair of the Senate Health, Education, Labor, and Pensions Committee, pulled back the curtain on an array of recruiting abuses, shoddy academic offerings, and low graduation rates. This, combined with extremely high executive compensation (averaging about $10.5 million) and the fact that almost all of this was coming from federal taxpayers, helped spark the downfall.

Most of the increased attention, though, has taken the form of consumer protection and not civil rights. Unlike the case of subprime lending, which saw a wave of civil rights suits targeted at lenders who willingly misled and targeted communities of color with predatory loans, the scrutiny of for-profit colleges has been relatively color-blind.

An additional problem, of course, is that all of this may be relatively temporary. Regulatory attention is only as good as the administration in power, and while we can thank the Obama administration for simply asking Corinthian to make good on its reporting requirements—and withholding the college’s allowance until it did so, leading to its demise—there’s no guarantee that future administrations will be willing to walk that regulatory beat.

In the interim, this whole era requires some reflection on why we placed the delivery of upward economic mobility in the hands of an industry funded generously out of the public coffers, while not demanding that they make good on their promise. Surely, if Congress passed a law banning these colleges tomorrow, it would not erase the inadequate provision of public services, the underfunding of public education, the lack of wage growth, or the unemployment that has plagued so many communities. In the wake of the largest college closure in our history, how many times must this story be told before we say no more?